Unit 7: Analyzing & Journalizing Payroll Transactions

1. Unit 7:Analyzing & Journalizing Payroll Transactions Chapter 6

2. Accounting for Payroll Transactions • Payroll requires entering data (in order) in the following places: • Payroll Register • Employee Earnings Records • General Journal • Journalize gross wages and withholdings • Journalize payroll taxes and worker’s compensation • Journalize period-end accruals • Post to General Ledger

3. Payroll Register • Payroll register lists employees in rows and shows following information for each • Gross wages • Taxes withheld and other deductions • Net pay • Payroll register shows (in columns) • Total of gross wages, each deduction and net • When completed, should “foot” or prove payroll register by ensuring that columns and rows all total to bottom right hand number *Use payroll register to journalize*

4. Employee’s Earnings Record • Employee Earnings Record used to track cumulative totals (wages and taxes) • Enter row of data each pay period • Important because different wage caps for FUTA, SUTA and OASDI taxes • Need to track cumulative totals in order to issue W-2s and do quarterly SUTA reports • Prepare payroll analyses- various internal and external reports

5. Recording Gross Payroll and Withholdings • Next screens shows how to enter information into accounting system • Gross payroll is debited • Each withholding tax is liability • Each withholding tax is a liability • Advanced EIC reduces FIT payable • All other payroll deductions are liabilities as well

6. Other Deductions from Payroll • Any deduction that the ER makes from EE paycheck goes into a liability account (because they owe it to someone) such as: • Group life insurance premiums • Health insurance premiums • Purchase government savings bonds • Union dues • Deferred compensation (contributions to pensions plan) • Child support/other garnishments

7. Garnishments • A creditor can, through the courts, seek repayment of his/her money by garnishment • Employer is required to comply with garnishment order • ER must withhold funds from EE’s paycheck and submit it to appropriate authorities • Child support (see next slide) • Creditor garnishments limited depending upon state • Administrative wage and student loan garnishments to 15% of disposable earnings

8. Child Support • Family Support Act of 1988 required immediate withholding for child-support payments • ER can withhold a state mandated fee for administration • Some states now require electronic submission of garnished child support payments • Maximum amount that can be withheld from a person’s weekly disposable earnings varies according to different support orders, but can be as high 50-65% of disposable earnings

9. Pension & Retirement Contributions • Pension plans that involve employee contributions result in liability for the employer • Recorded in payroll entry • Pension Protection Act of 2006 gives company ability to automatically enroll EEs in company’s plan and deduct contributions from pay

10. Methods of Paying Wages/Salaries • Cash/Check • Electronic payment methods • EFTS (Electronic funds transfer system) • Distribute electronic pay stub • Pay Cards • Cards that allow ER to deposit payroll into prepaid card; card then utilize like debit or credit card • As of 2006, 30 states allow their use • Final Pay • Many states set time limit between termination and final wage pay out • CA and MI require immediate payment if EE is fired

11. Journal Entries to Record Payroll • Journal Entry #1 - Record gross wages, withholdings and net pay • Journal Entry #2 - Record Employer payroll tax expense These two journal entries are always the same in format. You must make both of them every time you issue any paycheck (even if cutting a check for one day’s wages, for example).

12. Journal Entry #1 Gross OASD HI FIT SIT Insurance Net 1000.00 62.00 14.50 83.00 21.00 103.00 716.00 845.0052.3912.2591.0029.0088.00 572.36 $1845.00 $114.39 $26.75 $174.00 $50.00 $191.00 $1,288.86

13. Journal Entry #1 • Debit Wage Expense for gross payroll • Credit each withholding account- they are all liabilities • Credit cash (or wages payable) for net payroll Journal Entry #1 Wage Expense 1845.00 OASDI Payable 114.39 HI Payable 26.75 FIT Payable 174.00 SIT Payable 50.00 Insurance Payable 191.00 Cash 1,288.86

14. Journal Entry #2 Payroll for Period Ended 5/15/2008 EE Gross FUTA Wages SUTA Wages OASDI Wages HI Wages A 1,000.00 ---- 800.00 1,000.00 1,000.00 B 845.00 215.00845.00845.00845.00 Total $1845.00 $215.00 $1645.00 $1845.00 $1845.00 Tax $1.72 $46.06 $114.39 $26.75

15. Journal Entry #2 • Debit Payroll Tax Expense for total of all payroll taxes that ER pays • Credit each account- they are all liabilities Calculate all employer taxes utilizing wage bases and percentages Journal Entry #2 Payroll Tax expense 188.92 FUTA Payable 1.72 SUTA Payable 46.06 OASDI Payable 114.89 HI Payable 26.75

16. Recording Deposit of Payroll Taxes • Look in general ledger, in each applicable liability account, for amount due • Deposit 941 Taxes • Note: Don’t forget to doubleOASDI Payable 228.78 OASDI and HI HI Payable 53.50 FIT Payable 174.00 Cash 456.28 • Deposit State income tax Sit Payable 50.00 Cash 50.00 • Deposit SUTA SUTA Payable 46.06 Cash 46.06

17. Workers’ Compensation • Workers’ compensation is an expense for the employer, who is required to purchase insurance to protect employees against work related injuries/disabilities • Laws differ by state • Premium are calculated based on employment classification– per $100 of payroll • Pay premium in advance based on projected wages • Then, at year-end, report actual wages and pay additional premium • Or may receive credit toward next year

18. Journal Entry for Workers Compensation • Debit Work Comp. Insurance Expense for premium paid • Credit Cash (if paying) or insurance Payable (if accruing) Payroll for Period Ended 5/15/2008 Per $100 of payroll EE Gross Position Workers Comp. Rate Premium A 1000.00 Fabricator 9.08 90.80 B 845.00 Administrator 1.85 8.87 Total $1845.00 $99.67 Journal Entry Workers’ Comp. Insurance Expense 99.67 Cash or Insurance Payable 99.67

19. Journalize Period-End Accruals • Accrued wages should be recorded for wages earned by workers but not yet paid; • To record unpaid wages Wage Expense 1589.96 Wages Payable 1589.96 • Accrued vacation pay should be recorded for amount of vacation pay owed employees • Many ER’s now merging sick time and vacation time Vacation Benefits Expense 520.00 Vacation Benefits Payable 520.00

20. Summary of Accounts Used

21. Summary of Accounts Used